A Deep Dive Into The World of NFTs

2021 saw a 55% increase in sales of NFTs over 2020, and that fascination has continued into 2022. The concept of NFTs has been a lot longer than the most recent buzz surrounding them. For instance, the first NFT concept dates back to colored coins, which are fractions of a bitcoin with distinct information distinguishing each coin or linking it to real-world assets, such as a fiat currency. In 2017, CryptoKitties, perhaps the first modern incarnation of modern NFTs, was released. 

Although commonly understood as solely digital art, NFTs can represent a smorgasbord of tangible and intangible items, such as artwork, virtual items, music, digital trading cards, tokenized real-world assets such as sneakers, virtual land, and video footage. Ethereum has been home to most NFTs minted today. Various blockchain platforms offer NFT functionality, including Binance Smart Chain, Flow by Dapper Labs, Tron, EOS, Kadena, Polkadot, Tezos, Cosmos, WAX, and others.

What To Know Before Starting With NFTs

Due to ongoing scaling headaches on the Ethereum blockchain, which the project is seeking to remedy with Ethereum 2.0,  NFTs are currently expensive to mint (One must pay fees in gas, the unit of measurement in which one pays Ethereum fees to mint and transfer). Sidechains such as Polygon have lessed throughput on the Ethereum blockchain, which has in turn lowered the cost of gas. Developers can mint and transfer NFTs through the Polygon mainnet with a peg to Ethereum. 

Before you buy an NFT, there are certain things you’ll want to know. For instance, many NFTs do not exist entirely on a blockchain. They use parallel technologies, and are often not as centralized as blockchain-based NFTs. You’ll want to know if an NFT is on-chain or off-chain. An NFT stored on a blockchain offers a considerable value proposition over those NFTs which exist at least partially off chain. NFTs stored entirely on a blockchain are quite rare. Most blockchains claim they will one day offer totally on chain NFTs which are also easily minted. Kadena, for example, is trying to offer such functionality through their NFT tooling platform, Marmalade. Eth2 should also offer similar functionality. 

If an NFT is not stored on a blockchain, you’ll want to examine where it is actually stored. Often, NFTs are stored on technologies such as Interplanetary File System (IPFS) or Arweave, which we will detail later in this work. In the future, more and more NFTs will be deployed on a blockchain, allowing owners to stake collateral based on their NFTs, equip them with game items, and more. 

The difference between traditional in-game items and NFT-based in-game items is the difference between closed economies and open economies. Game developers like Fortnight make billions of dollars from selling centralized in game items. Users access their in-game items, which are still controlled by the game developer, through login-based systems—a user-friendly experience. But, closed economies stymie growth, which limits how big a game with centralized in game items can become 

NFTs allow the gaming industry to transition into an open economy, where game developers don’t control everything, which can be a burden for them, too. Instead, open markets provide economies of scale and better experience for NFT owners. 

What is an NFT?

The first digital assets were fungible tokens and cryptocurrencies, such as Bitcoin. 

On the other end of the spectrum exist tokens not interchangeable with each other. Each is unique. Most objects are non-fungible. They’re relatively unique. There’s no order book based exchange for them. The fungibility of these objects is relative. Certain objects might be fungible within a class of objects. One might argue, for instance, event tickets for the same general admission event are relatively fungible with one another. Two of the same shirt, in the same size and wear, are relatively fungible with each other, too. 

Marketplaces for NFTs

NFT marketplaces offer intriguing functionality. OpenSea, for instance, is a marketplace for all types of items. Game developers can spin up a marketplace where users buy and sell NFTs, as long as it conforms to either the ERC-721 or ERC1155 standard. The OpenSea API simplifies access to collectible NFTs. 

OpenSea’s wallet to wallet transfers ensure that anyone can sell items directly from your account, rather than escrowing them either in a  smart contract or in a centralized exchange. The platform supports eBay style bidding. 

OpenSea is a tool for developer’s to build a marketplace for their NFTs, featuring auctions, customization, control over fees, and more so that developers can monetize the secondary market for their NFTs. 

Other NFT marketplaces include Nifty Gateway, SuperRare, and Rarible. These sites simplified the minting of NFTs for non-coders within seconds and some do it off-chain for no costs. 

Why NFTs Are Cool

There are many reasons why people think NFTs are cool. One of the more far out ideas seems to be something like CryptoVoxels, a virtual world and metaverse on the Ethereum blockchain on which players can buy land, build stores and art galleries. In short, you can buy virtual land and build virtual experiences on it. 

CryptoVoxels

The developer behind CryptoVoxels built a business just by selling this virtual land and taking a commission from secondary trades on the market. Inside of this virtual world, you can build museums in which to display, for instance, your CryptoKitties collection. 

MetaFactory 

MetaFactory is a crowdfunding platform for the creation of community-owned brands with a focus on fashion/apparel. According to the startup, it acts “as a community-owned culture studio focused on the creation and sale of digi-physical goods that celebrate crypto.” Incorporating NFTs into the brand is a key part of MetaFactory’s approach. If you owned some of MetaFactory’s digi-physical goods, you could show off your physical assets inside of a virtual world. 

Ethereum Name Service

Ethereum Name Service (ENS) is one of the most exciting non-game assets. As a distributed, open, extensible naming system on Ethereum. ENS maps human-readable names like Bob.eth into machine-readable identifiers such as Ethereum addresses, other cryptocurrency addresses, content hashes, and metadata. OpenSea partnered with ENS and sold around a million dollars worth of short domains of three to six characters, which have proven to fuel a burgeoning secondary market. 

Decentraland

Decentraland is a virtual reality platform on the Ethereum blockchain, featuring wearables tradeable on open markets for Decentraland’s native MANA currency. You can customize your Decentraland avatars with wearables. Inhabitants create, experience, and monetize content and applications. Land in Decentraland is owned by the community, so they enjoy full control over such creations. The virtual land is on a blockchain-based ledger of parcels. Landowners control content published to their portion of land, identified by a set of cartesian coordinates (x,y). Contents span from static 3D scenes to interactive systems, including games. 

Land is a non-fungible, transferable, scarce digital asset in an Ethereum smart contract, and can be acquired by spending MANA, an ERC20 token. MANA can also be used to buy digital goods and services in Decentraland. 

Connie Digital

Connie Digital is an artist pioneering social tokens and NFTs. For instance, the artist developed the scarce social token HUE. It was the first social token used to trade NFTs, according to Connie Digital. HUE was created to be similar to a loyalty point, supporters can earn HUE for being a loyal newsletter subscriber. 

ERC-721 & ERC-1155

ERC-20 is composed of a simple contract which maps addresses to balances. ERC721 is a bit more sophisticated, featuring unique token IDs. In the case of CryptoKitties, you’d have Kitty 1 and Kitty 2, and so on. 

ERC1155 is newer than ERC721. The token considers that there are certain assets that are roughly the same as each other. For instance, imagine a fighting game, where you have Golden Guns, which you could identify as Golden Gun 1 and Golden Gun 2, but they’re interchangeable. You could save a lot of space, and make things a lot simpler, by just saying this user owns 20 Golden Guns, and this user owns 30 Golden Guns, and then have a separate class for shields. ERC1155 allows developers to combine the fungibility of something like ERC20 with the non-fungibility of ERC-721 in one contract. 

ERC-1155 as a functionality is a superset of ERC-721. If you want unique items, create a new class, and a new type of shield. A certain degree of fungibility within classes of items is possible. 

ERC-721

If you want to mint your own NFT on the Ethereum blockchain, you might want to use the ERC-721 token standard, the Ethereum-based token standard for NFTs. Wallets compatible with this standard include MetaMask, Trust Wallet or Coinbase. OpenSea, Rarible, and Mintable are Ethereum-based NFT marketplaces. 

Crypto Punks was the first non-fungible token on the Ethereum network. CryptoPunks was a smart contract that essentially stated which user owned a particular punk, whose metadata was stored on-chain. 

CryptoKitties took this concept further, creating a game where the cats inside the game were non-fungible tokens. CryptoKitties were bred through a so-called breeding mechanism at a rate of one every 15 minutes (672 per week) for one year.

An explosion and excitement around NFTs happened in late 2017, as CryptoKitties were selling for hundreds of thousands of dollars, but soon everything crashed. Regardless, CryptoKitties has already inspired what was possible with non-fungible tokens, and soon came a wave of CryptoKitties clones. 

Nothing quite caught on like CryptoPunks and CryptoKitties until mid-2018, as major companies both within and outside of crypto became interested in the potential for NFTs. MLB partnered with LucidSight on MLBChampions for instance, and the Los Angeles Dodgers held an NFT giveaway night. Formula One launched NFTs, too, with F1 Delta Time. Since, we’ve seen the art community embrace NFTs since, as well as virtual worlds begin selling virtual land represented as NFTs. 

ERC-1155 

ERC-1155 allows developers to manage fungible semi-fungible and non fungible tokens all in one contact. This saves time, cost and resources. The interface is similar to ERC-721. The main difference is the balance of the method requires an ID used to reference a specific token in contract. 

What is the NFT contract actually representing? 

NFTs are driven by knowing who owns what tokens, which is generally done via the “owner of” function. The “transfer method” allows you to transfer a token from one user to another. These two functions combine to create a NFT. 

With ERC 721, you have unique token IDs. Token metadata standard is essentially a way for the token to tell someone who’s reading the smart contract what data is associated with the token through a URL. The method takes in a token id, returns a URL of JSON. This URL can be an IPFS hash, a centralized server…This allows us to map the metadata to the actual look and feel on something like a marketplace or other application. 

NFT Storage

NFT tokens are stored on the blockchain. In many cases, the art or media to which the token correlates is stored off-chain. Therefore, the NFT someone buys might be dependent on the company keeping its servers online. Programmer Jonty Wareing tweetstormed about how tokens often point off-chain to an HTTP URL metadata file or an IPFS hash. 

“In short: Right now NFT’s are built on an absolute house of cards constructed by the people selling them,” tweeted developer Jonty Wareing. “It is likely that _every_ NFT sold so far will be broken within a decade.”

Since NFT artwork is not stored on the blockchain, it means their existence depends upon the duration a centralized server hosts it. When an NFT lives on-chain, the storage of metadata and art is decentralized, allowing true digital ownership. 

Arweave is a decentralized data storage system designed for the permanent storage of information through financial incentivization. Users back and store as much data as they can with storage endowments as rewards for those who contribute storage to Arweave, which provides a bridge to IPFS so that users might store information on both services for added security.

Arweave 

An NFT’s artwork can be uploaded to Arweave, a chain exclusively for storing large files in perpetuity. Arweave stores data at a fraction of the cost of Filecoin, Siacoin, and Storj. The blockweave solution pioneered by Arweave solves on-chain storage limitations. 

IPFS

The longevity of files on InterPlanetary File Storage (IPFS) is debated. IPFS is similar to BitTorrent. Upload a file, and it will be stored on several servers. So, someone must seed your file—a shortcoming of IPFS.  

Pinata

Pinata, an easy way to interact with IPFS, pins your file into IPFS. But, you’re again relying on a third party to do that. If Pinata goes offline, then your file will also be abandoned by them. Pinata,which claims to be the simplest way to upload and manage files on IPFS, pins your file into IPFS, but again you rely upon a third party. 

Main Challenges Facing NFTs

High Ethereum Gas Prices

Gas prices on Ethereum are prone to spikes, pushing some NFTs off-chain. Gas measures the costs of transactions on Ethereum, and all operations (like one smart contract calling another) cost a fee in gas. 

The Oracle Problem

The oracle problem refers to the fact that blockchains cannot natively pull in data from or push data out to any external system. The process of convert a house into an NFT requires an oracle, which is  trustless source of information from the real world in a smart contract. 

Longevity 

NFT developers face hurdles executing contracts needed to manage an NFT on Ethereum, because NFTs cannot communicate with external informations sources without an oracle. NFT tokens point to an off-chain URL, not media but a JSON metadata file or an IPFS hash referencing an IPFS gateway they host.  

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